SINGAPORE/MUMBAI (Reuters) - Rising demand in Asia could help drive silver to new highs as top consumers China and India buy more to meet industrial, retail and investment needs.

China's expanding electronics industry, growing appetite from the jewellery sector in India and rising demand from investors wary of inflation and record gold prices are combining to provide strong fundamental and investment support for the poor man's gold.

Spot silver rose to a nearly 31-year high of $31.22 an ounce on Jan. 3, still way below its all-time high near $50 on Jan 18, 1980. The rally could take silver toward $40 this year, analysts said.

"Demand for silver is probably driven more by Asia than anywhere else in the world," said Robin Bhar, an analyst at Credit Agricole. "Industrial demand is quite solid, investment demand is pretty strong as well."

Chinese imports, including powder, unwrought and semi-manufactured silver, have risen as demand has grown from electronic and manufacturing industries. Just three years after becoming a net importer, China imported 3,280 tonnes in the first 11 months of 2010 - over 10 percent of global supply.

Global silver supply is estimated at around 30,000 tonnes for this year, according to CRU Group.

"There's a lot more growth potential in China than there has been to date," said Giles Lloyd, a metals analyst at CRU in London. "Silver demand in China has not been that spectacular in the last five, ten years, unlike the growth in consumption of other metals."

Over the past ten years, China's silver demand has doubled, Lloyd said. But such fast growth is overshadowed by a 3.5-fold growth in consumption of zinc, he added.

Electronic manufacturing demand was likely to continue to rise as China makes more of the components such as circuit boards needed for assembly, many of which are still imported.

That bodes well for China's silver demand, but would not necessarily increase global consumption as demand would be transferred from electronic manufacturing elsewhere, Lloyd said.

About 70 percent of China's silver consumption is in industrial applications, mainly electronics. Rapid growth in the industry has accelerated with the global economic recovery from the financial crisis.

China produced 232 million computers in the first 11 months of the year, up 25 percent from a year earlier, and 895 million mobile phones during the same period, up 34.4 percent on the year, according to the National Bureau of Statistics.

A typical mobile phone contains about 0.35 grams of silver, the U.S. Geological Survey said in a report on mobile phone recycling.

The photovoltaic industry, another silver consumer, has also seen fast growth. It was the only industry worldwide that saw increased demand for silver in 2009, when other industrial users took a hit from the crisis, said GFMS and The Silver Institute in a report.

Silver demand in the industry was estimated to have reached 870 tonnes in 2009, up 30 percent on the year. Demand could reach 5,800 tonnes per annum by 2020, the report said.

But the industry is still in its infancy, and some analysts said it is too early to see it as a significant silver user.

SILVER LINING

China's silver mine production is the world's third highest after Peru and Mexico. Due to a lack of reliable data on the amount of silver recovered from base metal concentrate imports, estimates on overall supply vary.

Overall silver output, including secondary silver, at 10,566 tonnes in the first 11 months of 2010, is up 13.05 percent on the year, the China Nonferrous Metals Industry estimated. On an annualised basis, this is equivalent to 11,527

tonnes , up 11 percent on the year.

CRU Group estimates that in 2009 China's mine supply reached 2,825 tonnes, silver recovered from imported base metal concentrate came to about 2,500 tonnes, and total supply, including recycled metal and imports, at 7,850 tonnes.

Investment demand from China's growing middle class could also fuel demand for the metal. Investors rushed to buy gold in 2010, driving the country's gold consumption up 55 percent to 650 tonnes, by Macquarie's estimate. Silver could benefit from the same sentiment.

"China's silver demand will grow steadily. Investment demand in particular will catch up, once silver futures are launched," said Shi Qinghe, an analyst at Antaike, a state-backed research firm.

Shanghai Futures Exchange trades gold futures. The possibility of silver futures has been under discussion for some time, although the time frame remains unknown.

It is not just Chinese investors that see sparkle in silver. Consumers in India, the world's biggest retail gold market, are developing a taste for the metal too.

"Silver is now being taken seriously, most of the gold jewellers are setting up separate counters to sell silver," said Babu Alapatt, president of All Kerala Gold and Silver Merchants Association.

"A lot of capacity has been built by manufacturers due to renewed interest."

India's silver imports in 2010 rose by 20 percent on the year to 1,200 tonnes, the Bombay Bullion Association (BBA)estimates. The BBA expects imports to more than double this year, as consumers chase cheaper silver jewellery and seek an investment substitute for gold after bullion hit record highs.

"Imports of silver are phenomenal and growing faster than gold imports. We import about 20-30 tonnes of it every month on an all-India basis," said Suresh Hundia, promoter and chairman of a large Mumbai-based silver trader, Hundia Exports.

India, which produced just 206.95 tonnes of silver in 2009, depends on the overseas market for much of its consumption, 60 to 70 percent of which goes into jewellery and silverware.

SOME CLOUDS

On an inflation-adjusted basis, silver would need to rise to over $130 to match the 1980 peak.

"We'll likely see that all the concerns about debt and about what governments are doing to support economic growth through keeping interest rates at low levels and unconventional monetary policy favour gold and favour silver. So we see silver doing well and continuing to make new highs in 2011," said Bhar of Credit Agricole.

But Bhar and other analysts also expressed concerns over silver's large surplus, saying it could weigh on prices in the longer term once investment appetite wanes.

"The problem with the silver market at the moment is that it is generating a very large surplus," said Lloyd of CRU, adding that ETF holdings could be viewed as stocks that might one day add to the already overly abundant supply.

"Our assumption is that investment will peak within the next 18 months, and then you can see prices drift. If people that invested in silver stop buying and start selling, prices could fall very rapidly."

Holdings in the iShares Silver Trust , the world's largest silver-backed exchange-traded fund, reached a record-high of 10,964.14 tonnes in mid-December, before easing to 10,725.73 tonnes by Jan 14. The amount is twice the global market surplus, according to CRU statistics.

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